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Aggarwal, Aradhna

Working Paper
Regional Economic Integration and FDI in South
Asia : Prospects and Problems

Working Paper, No. 218

Provided in Cooperation with:

Indian Council for Research on International Economic Relations
(ICRIER)

Suggested Citation: Aggarwal, Aradhna (2008) : Regional Economic Integration and FDI in
South Asia : Prospects and Problems, Working Paper, No. 218, Indian Council for Research on
International Economic Relations (ICRIER), New Delhi

This Version is available at:

http://hdl.handle.net/10419/176236

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 Working Paper 218

Regional Economic Integration and

FDI in South Asia :
Prospects and Problems

Aradhna Aggarwal

July 2008

INDIAN COUNCIL FOR RESEARCH ON 1INTERNATIONAL ECONOMIC RELATIONS

 Table of Contents

Foreword .........................................................................................................................i
Abstract ..........................................................................................................................ii
I. Introduction ...............................................................................................................1
2. Regional Integration, Trade and FDI: Overview of Literature .................................2
2.1 Theoretical Literature..........................................................................................2
2.2 Empirical Studies ................................................................................................4
3. Regional Cooperation in South Asia.........................................................................6
4. Foreign Investment Flows in SAARC: The Current Status....................................10
4.1 Overall FDI Trends ...........................................................................................10
4.2 Patterns of FDI by Source Country...................................................................13
4.3 Intra Regional FDI Flows .................................................................................14
5. Intra-regional FDI Flows: Future Prospects ...........................................................20
5.1 Macro economic dynamics ...............................................................................27
5.2 Multilateral Liberalisation ................................................................................29
6. Challenges and Constraints.....................................................................................29
7. Conclusion ..............................................................................................................33
References....................................................................................................................34

List of Tables

Table 1 : RTAs and FDI flows: Selected Studies based on case-study approach..........4
Table 2 : RTAs and FDI flows: Selected Studies based on cross RTA approach .........5
Table 3 : Regional Trade Agreements in South Asia* ..................................................8
Table 4: BITs and DTTs held by the South Asian countries .........................................8
Table 5: Overall FDI Trends in South Asia ($US mn) ................................................11
Table 6: Share of Individual Countries in SAARC FDI Inflows in Selected Years
(1990-2005).................................................................................................12
Table 7 : Trends in FDI outflows from South Asia ($ mn) .........................................13
Table 8 : Share of 5 top investors in Individual South Asian Countries (%)...............14
Table 9: Intra Regional FDI Inflows (% of country total) ...........................................15
Table 10 : Share of top 5 investors in South Asia since 2002-06 (No. of projects) ....15
Table 11 : Source country-wise distribution of FDI projects from SAARC region in
India ............................................................................................................16
Table 12 : Country-wise distribution of India’s outward FDI in the SAARC Region
(US$ Mn) ....................................................................................................17
Table 13: Competitiveness Index of South Asian Countries ......................................21
Table 14: Composition of Export baskets of South Asian Countries at two digit level:
2004 (% share in total exports) ...................................................................23
Table 15 : An Overview of FDI Policies in South Asia ..............................................24
Table 16: Priority Sectors for FDI in South Asian Countries......................................26
Table 17: Macro economic dynamics of South Asian Economies ..............................28
Table 18: Regional Governance indices ......................................................................30
Table 19 : Infrastructure indices of selected regions ...................................................31
Table 20: Trade Rules in Selected Regions of the World............................................32
Table 21: Legal System Standards across different regions ........................................32
 Foreword

The emergence of ‘new regionalism’ is redefining regional cooperation and regional

trade agreements, the world over. The elements of deeper regional integration
incorporated in the currently proliferating RTAs go well beyond the traditional
modalities for economic cooperation. They aim at strengthening a region’s
participation in global production networks both through trade and capital flows. The
present study argues that there is need to forge deeper integration within the South
Asia region. It analyses the factors that can impede growth of both intra and extra
regional FDI flows and explores how these constraints may be addressed through
greater economic integration. The study concludes that a deeper form of cooperation
is an urgent necessity for the region for promoting FDI. I hope this study will result
in a better understanding of the issues related to promoting deeper economic
integration in South Asia.

(Rajiv Kumar)
Director & Chief Executive

July 30, 2008

i
 Abstract

The slow progress and modest achievements of regional integration in South Asia
have generated a huge amount of skepticism about its role as an effective strategy of
growth. The present study, however, argues that there is need to forge deeper
integration within the region. It examines the prospects and problems of serious fiscal
consolidation within the area. Essentially, it looks at the effect of deepened
regionalism on investment flows. It argues that regional integration has the potential
to promote intra and extra regional FDI flows and economic development in
individual countries of the region. This will pave the way for the most efficient use of
the region's resources through additional economies of scale, value addition,
employment and diffusion of technology. A number of challenges remain. Structural
weaknesses, institutional bottlenecks, political movements, narrow nationalism and
mutual mistrust are some of the factors that explain the failure of the region to exploit
possibilities. Paradoxically, the problems themselves provide strong motivation for
strengthening cooperation. It is only through more intensive collaboration that these
complexities can be addressed and resolved.

_______________________________

Key Words: Regional integration, South Asia, intra regional FDI, extra regional FDI,
SAFTA

JEL Classification: F15 F21 F23

ii
 Regional Economic Integration and FDI in South Asia:
Prospects and Problems

Aradhna Aggarwal

I. Introduction

The number of Regional Trade Agreements (RTAs)1 has been rising exponentially. In
1990, there were only about 40 accords in operation (Crawford and Laird 2000). By
July 2007, some 380 had been notified to the GATT/WTO. Of these, 205 were in
force (WTO, 2008). There is a view that the figure of operational RTAs could escalate
up to 400 by 2010 (Panitchpakdi, 2007). Proposals among developing countries have
also been mounting in a hurry. Several are being negotiated and more being studied.
According to Lamy (2006) in excess of 50 per cent of global trade is conducted
through RTAs.

The need to attract foreign investment has been cited as an impetus for RTAs (see, for
example, Balasubramanyam and Greenaway 1993). Traditionally, they aimed to lower
trade barriers. However, most in recent years have moved beyond the trade barrier
reducing exercise and involve specific commitments on investment2. These accords
are sometimes referred to as “comprehensive preferential trade and investment
agreements” or PTIAs (UNCTAD 2006) or “new generation RTAs”. Economic
integration in the form of PTIAs has become the nucleus of development strategy,
especially for developing countries. According to UNCTAD 2006, as of end 2005,
developing countries were parties to 79 per cent of the PTIA network, while
developed countries were involved in 54 per cent of the agreements. South-South
PTIAs have also increased to reach 86 RTAs at the end of 2005 (UNCTAD 2006a). In
addition, as of July 1, 2006, at least 67 were under negotiation, involving 106
countries.

The emergence of “new generation RTAs” has had a substantial effect on theoretical
and empirical literature. This body of work argues that RTAs affect FDI flows not
only through investment-specific provisions but also preferential trade-related
conditions and other initiatives contained in them. The relationship between regional
agreements and FDI flows is, however, complex and the outcome is determined by
many factors, including the degree of integration, the nature of capital flows, the
patterns of trade and FDI, the structural composition and the level of development of
partner countries.

The objective of the present study is to examine whether regional initiatives

undertaken in South Asia have had a favourable impact on foreign direct investment.
It qualitatively examines the trends and patterns of intra-regional investment flows
within the broad framework of the South Asian Association for Regional Cooperation
(SAARC), assesses future prospects of regional FDI, explores policy options for
partner countries in the changing policy environment, investigates challenges faced in
1
RTAs are sometimes referred to as economic integration agreements (see, UNCTAD 2006 and
references therein)
2
Therefore, the new wave of RTAs is generally referred to as “new regionalism” (see Burfisher et al
2003, Holmes et al. 2006 for discussion).

1
exploiting the potential of regional initiatives and identifies lessons to emulate East
Asia’s success story.

The analysis is organized into seven sections. Section 2 provides a comprehensive

overview of the theoretical and empirical literature on the impact of regional
integration on FDI flows. Section 3 describes current efforts at strengthening regional
cooperation and integration in South Asia and its relevance. Section 4 then examines
magnitudes and patterns of FDI flows both intra and extra regional, in the region.
Section 5 looks at the future prospects of intra regional investment flows. Section 6
analyses the challenges and constraints that need to be addressed to promote FDI
flows into the region. Finally Section 7 concludes the analysis.

2. Regional Integration, Trade and FDI: Overview of Literature

2.1 Theoretical Literature

Theoretically, there are three broad categories of provisions through which RTAs
influence FDI flows in the integrating regions (see for instance, Borenzstein and Lee
1995, Blomström and Kokko 1997, Dunning 1997): preferential trade terms,
investment –related stipulations and other forms of cooperation. Each of these effects
is discussed below.

Preferential trade provisions induced effects on investment: Preferential trade

conditions which aim at removing internal tariff barriers can affect both, intra-
regional FDI flows (generated in integrating countries) and extra regional FDI
(generated outside the region). Studies distinguish between static and dynamic
linkages between preferential trade provisions and FDI.

In static terms, the nature of the impact of trade-related provisions on intra-regional

FDI would be determined by the motive and nature of pre-agreement intra regional
investment (Blomstrom and Kokko 1997). The removal of trade barriers between
integrating countries can lower intra-regional FDI when it is mainly of a market -
seeking or tariff -jumping nature. With lowered trade barriers, companies with high
fixed costs may concentrate their activity in one country and serve the partner markets
through exports rather than set up subsidiaries in each of them. In this sense, one can
say that trade would substitute investment and the RTA would have a negative effect
on intra regional investment patterns. If, on the other hand, intra regional investment
is of an efficiency-seeking nature, an RTA would affect it desirably because freer
trade of goods and services enables companies to establish different elements of the
production process in locations where competitive conditions are most beneficial to it.
In this instance, investment complements trade.

Nonetheless, one cannot rule out the possibility that the formation of an RTA itself
would change the balance between vertical and horizontal FDI in member countries,
resulting in some increase in the former at the expense of the latter. Implementation of
the North American Free Trade Area (NAFTA), for instance, made production
sharing between the US and Mexico in the automobile sector possible. While the
manufacturing of parts and components was concentrated in the US, labour- intensive
assembly operations were transfered to Mexico. This resulted in a significant increase
in FDI flows into Mexico. The Rules of Origin riders can also encourage the use of

2
intra-regional inputs diverting extra-regional inputs, even if these were more efficient.
This would also promote intra-regional efficiency seeking FDI (Velde and Bezemer
2006). Finally, trade liberalisation opens up possibilities of cross-border investment in
trade, transport and distribution for partners which can promote intra-regional FDI in
services.

Extra-regional FDI may also be affected by the preferential trade stipulations of the
RTAs in different ways. First, RTAs may raise the fear of future protection for
external investors, inducing them to venture inside the area and earn the status of
being insiders (Blomstrom and Kokko 1997). Second, RTAs expand the market size
of individual countries by lowering tariffs and thus overcome the disadvantages of
small economies. It may therefore become profitable for an extra-regional investor to
have access to a larger market (Jaumotte 2004, Lederman, and others 2004 for
empirical analysis). Third, lowering of non-tariff barriers within an RTA may provide
an incentive to extra-regional investors to set up operations inside the region.
Evidence suggests that the elimination of the use of anti-dumping measures within the
European Union motivated the Japanese to set up operations inside the EU (Ray
Barrell and Nigel Pain 1999, Girma et.al 2002).

The dynamic effects of RTAs on FDI are analysed within the framework of the new
trade theories (Ethier 1998). While emphasizing the trade-productivity-growth links,
the studies are bringing to light the potential of RTAs increasing the appeal of the
region by promoting trade-oriented economic growth (Baldwin 1989). The creation of
an RTA may stimulate virtual competition between the participating countries,
driving them to improve their investment environment to the best available in the
region (Jaumotte 2004). In addition, a larger market provides opportunities to firms to
grow and become more competitive. This may lead to the creation of intangible assets
and thereby stimulate more investment. Finally, FDI may itself catalyse the growth of
the economy and contribute further to its own expansion by promoting technology
transfers and spillovers.

Effects of Investment-related Provisions: Investment provisions in RTAs consist of

rules on pre and post entry treatment, protection of FDI and expropriation and dispute
settlement mechanisms. These regulations liberalise FDI flows by
reducing/eliminating restrictions on the entry and ownership of foreign investors and
by ensuring that they do not suffer in treatment in comparison with their domestic
counterparts. The investment rules guarantee a predictable investment climate and
enhance investors’ confidence on the legal and political milieu, particularly in low
and middle income countries (Velde and Bezemer 2006). RTAs may have positive
effects on FDI inflows to the extent that the investment provisions lower barriers and
facilitate capital flows.

Other Forms of Regional Initiatives: RTAs cover various forms of regional co-
operation other than trade and investment terms. These include cross-border
movement of people, across-border transaction of funds, better information flows,
publication of data and statistics, contract enforcement and so on. Some regions
(ANDEAN, ASEAN, MERCOSUR) have cooperation schemes which aim to
establish regional enterprises by promoting joint ventures. Thus RTAs are not about
merely setting trade and investment rules. They improve the economic climate and
hence promote trade and investment activities.

3
2.2 Empirical Studies

Two approaches have been adopted to assess the impact of RTAs on FDI: the case
study based method and the cross-RTA approach.

Studies using the first procedure focus on a specific RTA and analyse its effect on
FDI inflows in integrating partners and /or excluded countries, either qualitatively or
by using quantitative tools. The findings of some of these studies are described in
Table 1.

Table 1 : RTAs and FDI flows: Selected Studies based on case-study approach

RTA Authors Findings

EU Pelkmans 1984, Dunning • Positive FDI effects;

1997, Srinivasan and Mody
1997, Brenton et al.1998,
Pain and Landsbury 1996
NAFTA DFAIT 1999 Blomstorm
and Kokko 1997, A.
Monge-Naranjo 2002,
Waldkirch 2003
MERCOSUR Blomström and Kokko 1997
ASEAN Jeon and Stone 2000
• Disagreement over whether the
positive effects were due to
intra-regional or extra regional
FDI
• Positive FDI effects;
• Disagreement over whether the
positive effects were due to
intra-regional or extra regional
FDI
• Strong positive impact.
• Unequal distribution of the
inflows of FDI among
participating countries3.
• Increase in intra-bloc FDI

Korea-U.S. Kang and Park 2004 • Increase in FDI by 14-35%

FTA from member countries and by
28%-35% from non-member
countries.

The cross- RTA approach based analyses use econometric models of FDI, in which
one of the explanatory variables is a dummy describing whether or not a country is a
member of a regional grouping. Findings of these studies are summarized in Table 2.

3
While Argentina and Brazil were found to benefit significantly, the experiences of Uruguay and
Paraguay were mixed

4
Table 2 : RTAs and FDI flows: Selected Studies based on cross RTA approach
Study Dataset Findings
Stein and Sample of 60 • Positive but insignificant effect of
Duade (2001) countries RTAs.
Adams et al. A panel of high- • Investment effects of RTAs come from
(2003) income and non-trade provisions.
developing • Countries with larger post-RTA market
countries over size, and better economic fundamentals
1988-1997 benefit more.
Yeyati et al. OECD countries • Positive effects on FDI.
(2003) over 1982-1999 • Benefits are unlikely to be distributed
evenly.
Jaumotte South-South • The RTA market size and the size of
(2004) RTAs with 71 domestic population had a positive
developing impact on the FDI.
countries during • Not all countries in the RTA benefited
1980–99 to the same extent from the RTA. 4
Velde & Developing • The type of regional grouping matters
Bezemer countries over i.e. whether or not RTA include certain
(2006) 1980-2001 trade and investment provisions.5
• Within a regional grouping, the position
of countries within a region matters.6
Baltagi et al. Europe over 1989- • RTA increases FDI up to by 78%
(2007) 2001 among European countries.
World Bank 152 countries with • RTA may help governments improve
2005 238 RTAs over the investment climate and bring in
the 1980–2002 more investment but is no substitute for
period an adequate investment climate.
Leshier and All North-South • Investment provisions in RTAs are
Miroudot RTAs in which I- positively associated with both trade
(2006) provisions were and investment flows.
substantive during • The results are more profound for FDI
1990-2004 flows than trade flows.
Medvedev A panel of 143 • FDI benefits of RTAs increase with the
(2006) countries over size of PTA partners.
1980–2003 • The effect is due mostly to North-South
and deep integration Agreements.

4
Countries with relatively higher education and financial stability tend to attract a larger share of the
FDI at the expense of other RTA members.
5
Formation of some RTAs (CARICOM, ASEAN, ANDEAN, NAFTA) succeeded in attracting
additional extra-regional FDI while this is not true for some others (SADC, COMESA and
MERCOSUR).
6
Smaller countries and countries located further away from the largest country in the region benefit
less from being part of a regional grouping than larger countries and those close to the core of the
region.

5
In general, while there seems to be unanimity that RTA -generated effects stimulate
FDI (or at least do not dampen them), economists are divided over whether the
positive (or non-negative) effects are due to intra-regional FDI effects or extra-
regional ones. Further, most studies indicate that the inclusion of investment
provisions in RTAs plays a crucial role in promoting investment flows. Nevertheless,
not all countries in the RTA are enriched to the same extent. Investment is expected to
flow to those members of RTAs that have locational advantages (Jaumotte, 2004).
Countries with relatively higher education and financial stability tend to attract a
larger share of the FDI at the expense of other RTA members. Investment effects of
RTAs therefore remain an empirical issue.

The present study adopts the first approach and focuses on initiatives in South Asia. It
examines the magnitude and patterns of investment in the region, in particular intra-
regional flows, against the backdrop of regional initiatives and discusses future
prospects within the context of growing regional cooperation

3. Regional Cooperation in South Asia

South Asia is one of the economically most underdeveloped expanses of the world
with five least developed countries viz. Afghanistan, Bangladesh, Bhutan, Maldives7
and Nepal, two low income countries viz. India and Pakistan and one lower middle
income country viz. Sri Lanka. This space is home to more than 20 per cent of the
world’s population including half the planet’s poor. In recent years, however, it has
emerged as one of the fastest- growing sections in Asia. According to ADB’s Asian
Development Outlook (2007) South Asia has averaged more than 7.5 per cent growth
since 2003, enabling it to reduce poverty levels. India is the largest country
accounting for almost 75 per cent of the population. As one of the world’s top ten
industrial powers, India has the most diversified regional industrial economy with the
second largest pool of English-speaking, scientific and engineering personnel in the
world (FICCI, 2003).

Most of these countries had adopted highly interventionist trade regimes in the initial
phases of their growth. But this started to change in the late 1970s. From 1977, Sri
Lanka began to liberalize gradually. It was followed by others in the 1980s. But this
environment began opening up as a whole from the early 1990s (Jayasuriya and
Weerakoon 2001, Sahoo 2006, RIS 2004, Dutta 2000). The process of economic
liberalization manifested itself in considerable reduction in investment and trade
barriers8.

Alongside multilateral trade liberalization, these countries also activated the process
of economic integration through regional, sub-regional and bilateral approaches. The
South Asian countries with the exception of Afghanistan, formed the South Asian

7
In terms of per capita income Maldives qualifies for the category of “lower middle income country”.
However, it is not shedding its “LDC” status for the fear of losing special benefits that it is enjoying
due to that status.
8
These reform efforts in individual countries are documented extensively in the literature and hence
not discussed here at length. (See Acharya 2006 and Tendulkar and Bhavani for India, Atiqur
Rehman and Tipur 2006 for Bangladesh, Hussain 2006 for Pakistan, Kelegama 2006 for Sri Lanka)

6
Association for Regional Cooperation (SAARC) in 1985 as a political consultation
entity.

In December 1991, SAARC approved the establishment of an Inter-Governmental

Group (IGG) at the Sixth Summit held in Colombo to formulate an agreement to
establish a “SAARC Preferential Arrangement” (SAPTA) by 1997. Given the
consensus within SAARC, the Agreement of SAPTA was signed on April 11, 1993,
(much ahead of the schedule) and entered into force on December 7, 1995. SAPTA
was envisaged primarily as the first step towards the transition to a South Asian Free
Trade Area (SAFTA) leading subsequently towards a Customs Union, Common
Market and Economic Union., The process of economic integration in South Asia
gathered momentum with the implementation of the agreement

The Agreement on South Asian Free Trade Area (SAFTA) was signed on January 6,
2004, during the Twelfth SAARC Summit in Islamabad. The deal entered into force
on January 1, 2006, and was formally launched on July 1, 2006. The special needs of
the Least Developed Contracting States are recognized by adopting concrete
preferential measures in their favour on a non-reciprocal basis. The arrangement is a
traditional trade barriers reducing exercise. Its major objective is to eliminate
obstacles to trade, both tariff and non-tariff, and facilitate the cross-border movement
of goods between the territories of the Contracting States9.

In addition to SAFTA, there have been three bilateral free trade agreements between
South Asian countries : India- Bhutan, India-Sri Lanka, Pakistan-Sri Lanka; one sub
regional preferential arrangement: Asia Pacific Trade Agreement10 (India,
Bangladesh, Sri Lanka, Philippines, Lao PDR and Korea) and seven trade
agreements: India-Nepal, India-Bangladesh, India-Maldives, Bangladesh-Nepal,
Bangladesh-Pakistan, Pakistan-Nepal and Sri Lanka-Nepal. Others are under process.
A comprehensive Economic Partnership Agreement between India and Sri Lanka is
under way. The Bay of Bengal Initiative for Multi-Sectoral Technical and Economic
Cooperation i.e. BIMSTEC (Bangladesh, Bhutan, India, Myanmar, Nepal, Sri Lanka
and Thailand)-FTA aims to achieve its own free trade area by 2017. Finally, four
RTAs are under negotiation: India-Pakistan, India-Bangladesh, Sri Lanka-Maldives
and Pakistan-Bangladesh (Chaturvedi 2007). Table 3 provides an overview of sub
regional/bilateral RTAs involving two or more South Asian countries.

A distinguishing feature of these agreements is that with the exception of BIMSTEC,

all others are traditional RTAs which aim at reducing/ eliminating only trade barriers
and exclude from their purview all other important issues such as services,
competition, IPRs, government procurement and investment. Thus, regional
cooperation in South Asia represents a shallow RTA, “old regionalism” only reducing
or eliminating barriers to trade in commodities despite the fact that chronologically, it
is a very recent phenomenon.

9
Under the Agreement, all non-LDC members would reduce their existing tariffs to 20 per cent (30per
cent for LDCs) within a time frame of two years from the date of coming into force of the
Agreement. The subsequent reduction to 0-5 per cent will be achieved within next five years’ (eight
years’ for LDCs) period.
10
Erstwhile Bangkok Agreement was initially signed in 1975.

7
Table 3 : Regional Trade Agreements in South Asia*

Bangladesh Bhutan India Maldives Nepal Pakistan

Bangladesh 1
Bhutan BIMSTECa 1
India TA ** FTA 1
BIMSTECa BIMSTECa
APTA
Maldives TA** 1
Nepal BINSTECa BIMSTECa TA**. - 1
TA** BIMSTECa
Pakistan TA** - - - TA** 1
Sri Lanka BIMSTECa BIMSTECa FTA, - BIMSTECa, FTA
APTA BIMTECa TA**
APTA

*These RTAs involve two or more South Asian countries; **: Trade Agreements, a Proposed

The participation of South Asian countries in other forms of FDI undertakings such as
BITs (Bilateral Investment Treaties) and DTTs (Double Tax Avoidance treaties) is
also negligible. Though they are involved in 109 BITs, there are only four BITs in the
region (Table 4). Double tax avoidance treaties are in force primarily among India,
Pakistan, Bangladesh and Nepal. Bhutan and Maldives are not members of any such
treaty.

Table 4: BITs and DTTs held by the South Asian countries

BITs DTTs
Total Intra Regional Total Intra Regional
India 26 1 with Sri Lanka 65 4, Sri Lanka, Nepal,
Bangladesh, Pakistan (Limited)
Pakistan 36 1 with Sri Lanka 51 4, India (Limited), Sri lanka
Bangladesh, Nepal
Sri Lanka 26 2 with India and 35 4, India, Sri Lanka , Pakistan,
Pakistan Nepal
Nepal 5 9 3, India, Sri lanka Pakistan,
Bangladesh
Bangladesh 16 20 3, India, Sri Lanka , Pakistan,
(Nepal under consideration)
Bhutan 0 0
Maldives 0 0
Total 109 4
Source: Compiled from individual countries’ relevant official websites

A “Draft Regional Agreement on Promotion and Protection of Investment” within the

SAARC Region is under consideration of the member States and is meant to create
conditions favourable for promoting and protecting investments in the region. Though
initiatives for the Agreement were launched at a meeting held in New Delhi on 29-30

8
September 1997, the progress has been extremely slow11. South Asian region is thus
viewed as one of the least integrated regions of the world representing old
“regionalism”.

Does that mean cooperation in South Asia can have no impact on FDI in the region?
There may be differing views on the success or failure of collaboration in South Asia.
But theoretically, one cannot rule out the possibility that investment effects of trade
provisions themselves may be substantial. Thus, even if all trade agreements in force
are of the traditional variety, these can still have substantial impact on FDI.

Furthermore, the phenomenon of regionalism needs to be analysed not merely in

terms of trade and investment but also with regard to other measures of cooperation
and their implication for promoting peace and harmony, and building confidence in
particular, in conflict-ridden regions such as South Asia (see also Khan and Larik
2007). The sub-continent is conflict-prone and vulnerable to continuous political
tension. Strains tend to recur periodically and have not allowed an atmosphere of trust
to transpire. Any initiative by these countries can prove instrumental in resolving
conflict and promoting harmony. This in turn can lead to a better investment climate.
Evidence suggests that regional integration in the form of economic cooperation and
political harmony are mutually-reinforcing. ASEAN + 3, APEC and ASEM in Asia
have led to improved relations between East Asian countries. The success of EU has
demonstrated that regionalism can be valuable in overcoming historical animosities
and ensuring stability. Mexico has a long history of distrust and resentment of the
U.S. But NAFTA has had a dramatic impact on the political relationship between the
United States and Mexico.

Finally, several initiatives have been taken by SAARC outside trade agreements,
which are likely to have a deepening effect on regional cooperation and affect trade
and investment flows positively. These are as under.

The SAARC Chamber of Commerce and Industry (SCCI): It was set up in 1992
as the first recognized regional Apex Body. SCCI brings together under one umbrella
the national chambers of commerce and industry of the member States and is actively
engaged in the promotion of trade and the interaction of the business community
within the SAARC region.

SAARC Trade Fairs: These exhibitions have become a regular feature since 1996
when the first Trade Fair was held in India. SAARC Trade Fairs provide a common
platform to the business and trading community for showcasing their products.

SAARC Finance: SAARCFINANCE is a formal body comprising of governors of

SAARC Central Banks which reports to the organization’s Council of Ministers. Its
objective is to strengthen the individual financial systems of the member countries
through the expansion of their institutional capacity, surveillance mechanism and
consultative capability on and coordination of macro-economic policies.

11
SAARC Secretary-General has recently announced that the SAARC is engaged in the early
finalization of the agreement on promotion and protection of investments (The Hindu, Feb 18, 2007).

9
Networking with international agencies: A Framework Cooperation Agreement was
signed between SAARC and ESCAP (Economic and Social Commission for Asia and
the Pacific) (February 1994) to provide for cooperation on developmental issues
through joint studies, workshops and seminars and exchange of information and
documentation in poverty alleviation, human resource development, trade promotion,
foreign direct investment, environmental protection, prevention of drug trafficking,
infrastructure development and so on.

South Asian Development Fund: It is proposed to set up a South Asian

Development Fund (SADF). The SDF will serve as an umbrella financial institution
for all SAARC projects and programmes. It has the potential to implement cross-
border collaborative projects, including those on improving infrastructure and the
energy sector.

SAARC University: The first South Asian University will be set up in Delhi and
begin educational activities by July 2009.

Governmental initiative on increasing regional cooperation is carried forward by a

group of international agencies12. These organizations have supported the formation
of the “South Asian Federation of Exchanges” (SAFE) in January 2000. Its members
comprise 13 stock exchanges in Bangladesh, Bhutan, India, Mauritius, Nepal,
Pakistan and Sri Lanka. The convener bourse, the Chittagong Stock Exchange, acts as
the SAFE secretariat. The objectives are two-fold: the strengthening of stock
exchange listing regulations in individual SAFE member countries and facilitation of
the progress towards harmonization of listing regulations to develop capital markets

These project is also likely to have substantial impact on capital and human resources
movement and, in turn, on FDI inflows. In what follows, we analyse the trends and
patterns of FDI in the region.

4. Foreign Investment Flows in SAARC: The Current Status

4.1 Overall FDI Trends

FDI Inflows

Until recently, most countries in South Asia were not seen by international investors
as attractive investment destinations. In any case, these countries themselves had a
restrictive attitude towards foreign investments. FDI flows were therefore quite
minimal (Table 5). In the early 1990s, most of them began opening up their
economies. This was also the period when schemes for regional cooperation were
accelerated. FDI flows to the region started to pick up in the 1990s and have gathered
further momentum in the past few years. Thus, FDI to South Asia increased from an

12
The Financial Sector Reform and Strengthening Initiative (FIRST) a $65 million, multi-donor
programme is supported by the World Bank, the International Monetary Fund (IMF), and five
bilateral donors: the Department for International Development of the United Kingdom, the
Canadian International Development Agency, the State Secretariat for Economic Affairs of
Switzerland, the Ministry of Foreign Affairs of the Netherlands and the Swedish International
Development Cooperation Agency.

10
average of $2.5 billion per year during 1990-2000 to an average of $13.3 billion per
year over 2004-06, an around six-fold increase (UNCTAD 2007)13. All the countries
of the region (with the only exception of Bhutan and Nepal) have gained in terms of
FDI flows. In fact, they grew faster than either the rest of the developing world or the
the world at large. The ratio of FDI inflows to capital formation also doubled from
2.3 during 1990-2000 to 9.3 by 2006.

Table 5: Overall FDI Trends in South Asia ($US mn)

1980- 1990- 2003 2004 2005 2006

85 2000

Bangladesh -0.1 190.0 350.0 460.43 692.0 625.0

(2.5) (2.9) (3.0) (4.9) (3.9)
Bhutan NA 2.0 1.06 3.0 9.0 6.0
(0.1) (0.3) (0.1) (1.4) (0.9)
India 62 1705.0 4585.0 5771 6676.0 16881.0
(3.0) (3.4) (3.2) (3.6) (8.7)
Nepal 0.2 11 14.8 2.0 -7.0
(0.6) (1.3) (0.2) (-0.4)
Pakistan 75 463.0 534.0 1118.0 2201.0 4273.0
(7.2) (4.2) (7.5) (13.0) (24.1)
Sri Lanka 42 159.0 228.7 233.0 272.0 480.0
(5.6) (5.7) (4.7) (4.2) (6.2)
Maldives -.03 9.0 14.0 15.0 9.0 14.0
(7.6) (7.2) (5.4) (4.8) (6.4)
South Asia 178.8 2539.0 5727.6 7601 9866.0 22274.0
(2.3) (3.5) (3.4) (4.3) (9.3)
Asia 5043 76616.0 110489.0 169999.0 208744.0 259434
(8.0) (7.7) (9.4) (11.1) (12.9)
Developing 12634 134670.0 175138.0 283030.0 314316.0 379070
Countries (8.9) (9.3) (10.7) (12.8) (13.8)
World 49813 495391.0 557869.0 742143.0 945795.0 1305852
(7.6) (7.3) (7.7) (9.4) (12.6)
Note : Parentheses show the ratio of FDI to gross capital formation
Source : UNCTAD (2007)

Yet, despite the big jump in FDI inflows, the share of the region in global FDI flows
remains negligibly small. While the average annual share of developing countries in
global FDI inflows during 2004-06 was over 32 per cent, South Asia accounted for
only 1.7 per cent of the global FDI inflows. In addition, for none of the countries
(except Pakistan) was the average ratio of FDI inflows to gross fixed capital
formation in 2004-06 higher than for developing countries as a whole.

13
It is instructive to note that FDI statistics of South Asian countries as provided in earlier issues of
World Investment Reports are not comparable with the actual statistics provided by the country
specific sources.

11
Table 6 shows that within these overall trends, individual countries performed highly
unevenly. India alone contributed three-fourths of total FDI to South Asia in 2006.
Pakistan, Bangladesh and Sri Lanka accounted for almost 24 per cent of the
investment. The share of Nepal, Bhutan and Maldives had been negligible. In relative
terms, however, only Pakistan and Bangladesh improved their share in the SAARC
FDI. All other countries (including India) witnessed a decline in their allocation to
regional FDI inflows. In 2007-08, however, India witnessed a phenomenal increase in
FDI which exploded to $25 billion, overwhelming the performance of other countries
in the region. Pakistan registered a decline of 14.1 per cent during this period.

Table 6: Share of Individual Countries in SAARC FDI Inflows in Selected Years

(1990-2005)

1990-2000 2003 2004 2005 2006

Share in South Asia (%)

Bangladesh 7.48 6.11 6.06 7.01 2.81
Bhutan 0.08 0.02 0.04 0.09 0.03
India 67.15 80.05 75.92 67.67 75.79
Nepal 0.43 0.26 0.03 -0.07 0.00
Pakistan 18.24 9.32 14.71 22.31 19.18
Sri Lanka 6.26 3.99 3.07 2.76 2.15
Maldives 0.35 0.24 0.20 0.09 0.06

Share of South Asia in (%)

Asia 3.31 5.18 4.47 4.73 8.59
Developing 1.89 3.27 2.69 3.14 5.88
countries
World 0.51 1.03 1.02 1.04 1.71

Source : UNCTAD (2007)

FDI Outflows

Outward investment from developing countries has gone up significantly since 2004
(UNCTAD 2007). It increased sharply from $35 bn to $113 bn in 2004 and then
touched the peak of $174 bn in 2006. It was primarily due to a massive increase in
FDI outflows from Asia (table 7). Total outflows from South Asia also increased and
stood at $9.8 billion in 2006, compared with $124 million in 1990-2000. Its share in
Asia’s FDI outflows swelled from 2.6 per cent in 2004 to over 8 per cent in 2006. But
India alone represented over 95 per cent of total outflows. For all other countries
these movements were insignificant and did not surpass even the $50 million mark.

12
Table 7 : Trends in FDI outflows from South Asia ($ mn)

1990- 2003 2004 2005 2006

2000
Bangladesh 4 6 6 2 8
Bhutan Nil Nil Nil Nil Nil
India 121 1325 2179 2495 9676
Nepal Nil Nil Nil Nil Nil
Pakistan 5 19 56 44 107
Sri Lanka 7 27 6 38 29
Maldives 1 Nil Nil Nil Nil
South Asia 124 1378 2247 2579 9820
Share of India in South Asia (%) 97.58 96.15 96.97 96.74 98.53
Share of South Asia in Asia (%) 0.37 7.25 2.57 3.32 8.39
Share of Asia in Developing 66.00 53.40 74.54 67.10 67.13
countries (%)
Share of Developing countries in 6.30 13.90 13.37 13.84 14.34
world (%)
Source: UNCTAD (2007)

In sum, since 2004, FDI flows into South Asia have been increasing more rapidly than
in the developing world. Within the region, however, only India, Pakistan and
Bangladesh have succeeded in stimulating FDI inflows; other countries do not seem
to benefit from the current growth of the phenomenon. While one cannot rule out the
possibility that regional programmes along with multilateral reforms might have had a
positive impact on FDI flows, clearly the advantages were not equally distributed.
These initiatives, as stated above, are no substitute for the congeniality of country-
specific investment climates.

4.2 Patterns of FDI by Source Country

The sources of FDI are highly diversified in most SAARC countries. Though the
dominant tendency is still for FDI to originate in developed countries, the share of
developing countries is also fairly significant. The rationale behind FDI from
developed country sources is directly related to the industrial sophistication of the
host country. Thus India, which is industrially the most advanced country in the
region, , attracts most of its FDI inflows from the developed world. Notwithstanding
the fact that the traditional OECD countries contributed only 27 per cent of total FDI
during 2006 and 2007, investment which is routed through Mauritius and Singapore
and accounts for 49 per cent of FDI inflows into India, also originates primarily in
developed countries. This is due to tax benefits available to investors as a result of
trade and investment agreements with these countries. Other developing countries
accounted for only six per cent of total FDI inflows into India in 2006 and 2007. In
Sri Lanka, which is a middle income country, the major investors are from the US,
UK and Australia. The share of the non-OECD investment is relatively smaller for
Pakistan (60.5 per cent in 2006-8) and Bangladesh (51.2 per cent in 2005-6). Of the
50 countries that have their commercial presence in Nepal (up to 2005-06), 33 are
developing countries, accounting for 66 per cent of FDI in the country. Very few FDI

13
projects have been commissioned in Bhutan. UNESCAP (2006) provides information
on five FDI projects in Bhutan, two of which are in collaboration with Singapore
while one each is a joint venture with India and Japan. The remaining project is a
bank (Bhutan National Bank) in which ADB holds 10 per cent equity share.

Locational proximity is an important determinant of investment decisions for

developing country firms. Fifty-six per cent of the non-OECD investment in Pakistan
during the past two years originated from neighbouring West Asia; the share of South,
East and South East Asia was 34 per cent. In Bangladesh, closely-situated South and
South East Asian countries are the major developing country investors. They
accounted for more than 24 per cent of the total FDI in the past two years. Egypt and
UAE have recently emerged as major investors in the country. In Nepal, India and
China alone accounted for 60 per cent of investment during 2005-7. Other nearby
sources, viz. Taiwan, Singapore, South Korea, are also important contributors to the
country. Sri Lanka has a large commercial presence of firms from close- at- hand
Singapore, Malaysia, South Korea, Hong Kong and India.

Table 8 : Share of 5 top investors in Individual South Asian Countries (%)

Host Year Top 5 countries Share of Share of No. of

country top 5 traditional identified
countries OECD source
countries countries
(%)
India 2006 and Mauritius, UK, 66.1 27.0 100
2007 Singapore, US,
NRI
Bangladesh 2005 and US, UK, Egypt, 68 51.2 31
2006 UAE, Norway
Pakistan 2006-7 US,UAE*, UK, 64.1 60.5 33
and Netherlands,
2007-8 Switzerland
Nepal 2005-08 India, China, 67.0 22 25
S.Korea, Japan,
Canada,
Sri Lanka 2002 Malaysia, 62 NA NA
Singapore, UK,
India, USA
Sources: BOI: Pakistan and Bangladesh; DOI: Nepal; SIA: India; ESCAP (2003): Sri Lanka.

4.3 Intra Regional FDI Flows

If geographical proximity is important for developing country firms then one should
expect large intra regional FDI inflows in SAARC countries, especially after the
regional initiatives took off. Table 9 indicates that intra regional inflows have
increased in the post- 2000 period but, with a few exceptions, they remain rather
small. Regional FDI flows into the three largest recipients of FDI viz. India,
Bangladesh and Pakistan, are negligible. However, Nepal, and, since 2002, Sri Lanka,
has been attracting substantial FDI from India.

14
Table 9: Intra Regional FDI Inflows (% of country total)

India Bangladesh Pakistan Sri Nepal

Lanka
2001- 2006- 1995- 2005- 2001- 2006- Upto 2006- 2005
3 7 6 6 5 8 2006 07
India - - 0.62 0.54 .001 .002 40.71 46.6 6.2
Bangladesh - - - - .05 .10 0.75 - .18*
Pakistan - - 1.4 1.87 - 0.47 - .6*
Nepal - - - - - - - -
Sri Lanka .009 .014 0.23 .41 - - 0.13 -
Bhutan - - 0.005 - - .01 - -
Maldives .008 .009 0 - - 0.0 - Na
Share of .017 .023 2.25 2.82 .06 .102 41.8 46.6 7.0
South ASIA
* pertain to the year 2000. It’s not expected to have changed
Sources: BOI: Pakistan and Bangladesh, SIA: India; DOI: Nepal; UNESCAP 2006: Bhutan

It is generally expected that because Third World companies are relatively small they
will invest in labour-intensive small businesses. If that is indeed the case, it is possible
that the magnitude of FDI does not reflect the true significance of a developing
country FDI. Therefore, analysis of intra-regional investment on the basis of the
number of projects may be useful. Locomonitor, which tracks year-wise FDI projects
by country since 2002, also shows that India is emerging as a major investor within
the region. Table 10 shows the five top investors in each of the SAARC countries (for
which information is available) over the past 4 years. It suggests that India has figured
as one of the top investors in all FDI- receiving South Asian countries in terms of the
number of projects. Thus a beginning has been made in the direction of investment
relations.

Table 10 : Share of top 5 investors in South Asia since 2002-06 (No. of projects)

Sri Lanka Pakistan Bangladesh India

India 19 (40%) 9 (6%) 14 (27%)

US 8 (17%) 26(18%) 8 (16%) 1267 (46%)
UK 3(6%) 4 (8%) 300(11%)
Germany 2(6%) 9(6%) 7 (14%) 195(7%)
Japan 142 (5%)
France 102(4%)
Malaysia 3 (4%)
China 12(9%)
UAE 18(13%)
Total 54 1500 51 3051

Source: Loco monitor website

15
In what follows, we provide a descriptive analysis of intra-regional FDI inflows and
outflows of SAARC countries.

India

Table 11 is based on the information provided by the Secretariat of foreign investment

approvals and actual inflows. It is interesting to note that Sri Lanka has emerged as
the largest investor in India from the region. Sri Lanka accounted for 84 per cent of
total projects approved over the period 1998-00. After the India-Sri Lanka FTA came
into force in 2000, flows from Sri Lanka also increased. Of the total 31 projects
cleared during 2002-2006, 28 were from that country. Other investors from the region
viz. Bangladesh (6), Maldives (4) and Nepal (1), were left far behind despite SAPTA
and then SAFTA. Recently, a Sri Lankan company has set up its own SEZ (Brandix)
in the country in the textile sector.

Sectorally, intra-regional FDI into India is dominated by trade and distribution. One-
third of total FDI proposals from the regional countries between 1998 and 2006 was
in this area. This was followed by travel and transport and IT services. FDI in
manufacturing was in low tech labour- intensive sectors such as food, textiles and
leather.

Table 11 : Source country-wise distribution of FDI projects from SAARC region

in India

SAARC Sri Lanka Bangladesh Maldives Nepal

countries
1998-00 17 10 4 3 0
2001 7 7 0
2002 4 3 1 0
2003 3 3 0
2005 11 9 1 1 0
2006 7 7 0 0 0
2007 6 6 0 0 0

Source: Newsletters, various issues, Department of industrial Promotion and Policy

Table 12 shows the magnitude and patterns of outward investment that originated in
India in terms of approvals. It suggests that South Asia accounts for only 1.5 per cent
of total Indian outbound investment. From 2003, more than 80 per cent of Indian
investment in the region flowed to Sri Lanka. Indian investment in Nepal was also
significant but declined after 2002.

16
Table 12 : Country-wise distribution of India’s outward FDI in the SAARC
Region (US$ Mn)

Total South Bhutan BD Maldives Nepal Pakistan Sri

Outward Asia Lanka
1996-02 6353.6 2.6 0.0 9.1 12.8 40.7 0.0 37.4
2002-03 1334.3 1.2 0.0 7.4 0.0 35.6 15.7 41.3
2003-04 1191.2 4.5 0.0 7.6 0.0 9.9 0.0 82.6
2004-05 2262.9 0.7 0.0 11.1 0.0 24.9 0.0 64.1
2005-06 2136.3 1.0 0.0 5.9 5.4 3.9 0.0 84.9
2006-07 5370.7 0.1 0.9 11.1 0.9 2.1 0.0 85.0
Total 18653.7 1.5 1.8 8.4 7.9 29.5 0.9 51.4

Source: Computed from the Ministry of Finance Database

Sri Lanka

India is one of the largest overall foreign direct investors in Sri Lanka (following
Singapore, UK and Australia). Although historically inflows have been low, there has
been a dramatic increase after the India-Sri Lanka FTA came into effect. In the year
2000, India’s share was just about two per cent (Jayasuriya and Weerakoon 2001) in
Sri Lankan FDI stocks and the country did not even figure among the top 10 investors
(Kelegama and Mukherjee 2007). Within five years it became the fourth-largest The
year 2006 witnessed a cumulative total investment of USD 170 mn against the
cumulative total of USD 94 mn in 2000, registering India as one of the major foreign
direct investment sources of Sri Lanka14. Seeing the potential for investments from
India, the Sri Lankan Board of Investments opened its first overseas branch in
Bangalore on May 23, 2005.

The principal sectors which have attracted Indian investment are steel, cement, rubber
products, tourism, computer software, IT-training and other professional services.
Some of the most visible Indian investments are Lanka Indian Oil Corporation, Tatas
(Taj Hotels, VSNL, Watawala tea plantations) Apollo Hospitals, LIC , L & T (now
Aditya Birla Group), Ambujas, Rediffusion, Ceat, Nicholas Piramal, Jet Airways,
Sahara, Indian Airlines and Ashok Leyland. Indian Human Resources and Education
Companies like ICFAI have also started entering the Sri Lankan market. Indian banks
like ICICI, UTI Bank, and an educational establishment like the Manipal Medical
Institute, are in the pipeline. Over the past three years, leading Indian companies such
as Gujarat Ambuja, Asian Paints and Larsen and Toubro have committed substantial
investments, while existing companies_--CEAT and Taj Hotels, for example-- have
expanded their operations. A further impetus to bilateral economic relations is
expected following the implementation of the Indo-Sri Lanka comprehensive
economic agreement.

14
Speech by the DHC on India Sri Lanka Trade Relations

17
Clearly, the India- Sri Lanka FTA has been a significant success in terms of
investment flows. It has promoted intra-regional investment in both the countries. Sri
Lanka has another FTA in force with Pakistan (PSLFTA). It was signed in July 2002
and came into operation on June 12, 2005. Much is expected of the FTA. Currently,
trade between India and Pakistan takes place mostly via Singapore or Dubai. Sri
Lanka can promote Indo-Pakistan trade by encouraging Pakistani investors to open
operations in Sri Lanka in order to trade with India using the ISLBFTA and vice versa
and can gradually acquire the hub status in South Asia . This can promote efficiency
in seeking investment in Sri Lanka. However, though there have been several
inquiries, no significant progress has been made in this direction till date.

Pakistan

Pakistan has opened all its sectors for FDI. However, response is still negligible. Of
all the companies in Pakistan since 2002, data is tracked by Locomonitor for 1500
foreign companies that have initiated investment projects since 2002. Of the top five
multinationals approved, two are Indian: Tata Consultancy and UTI. They will initiate
seven projects in Pakistan. Dabur India will soon acquire a foothold by setting up a
manufacturing joint venture with a Pakistani firm. Ayurvedic products will be the
fulcrum of their joint ventures. But progress seems slow. These countries are not even
signatories of BITs.

Bangladesh’s investment in Pakistan has increased in the past two years. Both
countries have been signing MOUs for promoting joint ventures in tourism,
establishment of beach resorts, heritage and amusement parks, hotels, customs and
visa facilitation and training in hotel management and hospitality services. Both
countries have also formed Joint Economic Commission (JEC), a Joint Working
Group and Joint Business Councils. They have formed a Pakistan-Bangladesh Joint
Investment Company to finance joint ventures in several key areas such as textiles,
pharmaceuticals, readymade garments, IT, auto industry and agriculture to enhance
bilateral trade. A free trade agreement (FTA) is in progress to enhance mutual trade
and cash in on the economic growth in both countries.

Sri Lanka –Pakistan FTA has recently come into operation and efforts are being made
by the respective Boards of Investment to persuade investors through seminars,
conferences and research to set up ventures across borders. However, forward
movement has not been registered in terms of FDI.

Bangladesh

On an average, regional FDI accounted for 2.25 per cent of total FDI flows into
Bangladesh during the period 1995-2006 (Bhattacharya 2007). However, during the
past two years it was 2.82 per cent, primarily owing to increased FDI from Pakistan.
Investment from Sri Lanka has also increased somewhat. Sri Lanka has invested in
the service sector while India’s investors are in the chemical and engineering
segments. In terms of the number of projects, India is one of the top five that have
invested since 2002. State Bank of India is among the leading five companies that
have invested here. Some Indian companies in Bangladesh include Asian paints,
Marico, ACI Godrej-agrovet and Neelkamal Padma Plastics private limited.

18
In the export-oriented sector also, the share of intra-regional investment was only 1.35
per cent as on January 2007 but in the agro sector it accounts for more than 73 per
cent of investment. Of the cumulative South Asian investments in the EPZs, 53 per
cent has been made by India and 43 per cent by Pakistan (Bhattacharya 2007).

Nepal

The Nepalese Department of Industries’ statistics reports that as of end 2006 there
were a total of 1067 foreign projects. Of them 362 have originated from the region
itself (over one-third). These projects accounted for more than 47 per cent of overall
employment in foreign companies. India alone has 331 projects approved in the
country. South Asian companies have invested in construction, manufacturing,
tourism and services. While investment from India is dominated by manufacturing,
Sri Lanka has primarily invested in the service sector. FDI from Pakistan, Bangladesh
and Bhutan are highly diversified into manufacturing, services and tourism. In the
manufacturing sector, textiles, chemicals, food and beverages and fabricated metals
attract the largest FDI in the country.

Bhutan

Only five FDI projects have been commissioned in Bhutan. Of them two have been
set up by Singapore (tourism), one by India (finance) and one by Japan (metal based
manufacturing). The fifth project is equity held by ADB in the National Bank. It was
expected that FDI inflows would grow after the introduction of the FDI policy in 2002
but Bhutan’s external financing continues to rely heavily on foreign aid, grants and
loans.

Maldives

Several foreign companies and individuals have invested in the Maldives but it has
not been possible to obtain all the details about these investments since government
authorities have not been willing to disclose such information.

In sum, the above analysis suggests that new investment opportunities are emerging
for firms in the region and that intra-regional FDI flows have been increasing slowly
in absolute terms. But neither multilateral liberalization nor regional integration
succeeded in making a significant impact on intra-regional FDI. However, Sri Lanka-
India FTA appears to have had a substantial impact on investment flows. Efforts are
now being made to promote other bilateral FTAs. Further, Indian firms have been
emerging as important investors in the region, which was predictable. Firms from
more advanced developing countries have firm specific advantages which they can
‘cash in’ on in other such economies if investment barriers are lowered. Less
developed countries, on the other hand, attract investors to grasp the new
opportunities emerging there. These patterns are somewhat visible but countries in
this region have not exploited the potential of intra-regional FDI inflows. A part of
this could be owing to shallow regional assimilation. Empirical studies have shown
that investment provisions have a greater impact on FDI flows than the trade related
conditions.

19
Many believe that any direct increase in intra regional trade and investment will be
limited despite deeper integration because South Asian countries share some basic
similarities (low income, relative labour abundance and comparative advantage in
similar commodities) which reduce the potential for trade (Kemal 2001) and
investment. The argument is that even after SAPTA came into force in 1995, intra-
SAARC trade has remained a small fraction (4.5 per cent) of total trade. Intra-EU
trade is 55 per cent, intra-NAFTA trade stands at 61 per cent and intra-ASEAN trade
is 25 per cent of its total. Others show that there is considerable scope for intra
regional economic activity (see, Taneja 2001, 2004, 2006 Mohanty 2003). Most
analyses focus on trade, but there is need to assess the future prospects of FDI flows
also.

In what follows, we focus on the future of FDI inflows, in particular, the intra regional
variety. We argue that the deepening of regional cooperation is vital for stimulating
FDI inflows and outflows.

5. Intra-regional FDI Flows: Future Prospects

There are vast differences in terms of the technological sophistication of these

economies. The Global Competitiveness Report 2007-8 reports that India leads the
group and is ranked 48th followed by Sri Lanka (70), Pakistan (92), Bangladesh
(107), and Nepal (114). In terms of the “basic requirement factors” (macro economic
stability, institutions, infrastructure) the countries are closely placed. Dissimilarities
increase in the category of “efficiency enhancing factors”. In the third category of
considerations that represent technological readiness and innovative capabilities, the
gaps seem to be huge. These dissimilitudes create strong possibilities for domestic
market-seeking as well as efficiency-seeking FDI as has been suggested above. This
also shows that there are opportunities for production- sharing that allow creation of
global value chains within the region and entry of firms into existing networks at
different stages of manufacture. Firms in relatively advanced countries can trace
subsidiaries in contiguous locations for low value-added activities. Domestic market
seeking joint ventures between developing countries can create big opportunities for
technology spillover among local enterprises.

Structural contrasts also provide enormous scope for FDI in the service sector.
Mukherjee (2005) shows that revealed comparative advantage of South Asian
countries in services differ across sectors. While Pakistan and Sri Lanka have
comparative advantage in transport services, Maldives has this benefit in travel and
tourism and India in IT and IT-enabled services. There is thus scope for cooperation
in the service sector as well. Moreover, production sharing is not limited to trade in
goods as service functions can also be fragmented and dispersed to take advantage of
marginal differences in costs, resources, logistics and markets. There is scope of
service MNCs in the region and creation and extension of global value chains. There
are thus enormous openings for vertical FDI by firms both from within the partner
countries and from outside the RTA. India has become the leading destinations for the
outsourcing of BPO and IT services. Outsourcing to India has evolved to more
sophisticated and skills-based services including software development, research and
development (R&D), financial portfolio analysis, patent

20
Table 13: Competitiveness Index of South Asian Countries

Rank Index of scores (India =100)

GCI basic efficiency innovativeness GCI basic efficiency Innovativeness
rank requirement enhances score requirement enhances
index
India 48 74 31 26 100 100 100 100

Sri Lanka 70 85 73 47 92.1 97.2 84.1 89.9

Pakistan 92 98 81 78 87.1 91.0 81.9 80.3

B.desh 107 111 91 111 82 85.3 78.5 68.6

Nepal 114 115 115 120 78.1 83.9 70.4 66.3

Source: GCR, 2007-08

21
writing and product design and development. There are therefore opportunities to
outsource low-to-mid skill areas like call centres and routine data-crunching tasks to
less advanced countries. Press reports indicate that Indian firms are assisting the call
centre industry in Pakistan.
Regional diversities are reflected in national competitive advantages and mirrored in
their export basket. India’s exports are highly diversified and include durable
consumer goods, intermediate products and certain electrical and electronics
machinery that is competitive in South Asian markets given the level of sophistication
of these markets. Other economies in the region are smaller and are specialized (in
varying degrees) in the production of labour intensive products, especially textiles,
garments, leather goods, seafood and agricultural products. There is huge latitude for
industrial diversification and cooperation among these economies. As suggested
above, the process of modernization is already under way albeit slowly. Intra regional
FDI itself can play a vital role in bringing these economies uptodate.
Several companies have gradually accumulated technological capability, established
firm leads and are looking for the chance to expand in similar markets. According to
the investment development path (IDP) approach, contributed by Dunning (1979),
these companies tend to invest initially in resource and market-seeking activities in
neighbouring or other developing countries, and then expand their presence
worldwide (Dunning, 1979, 1993; Narula, 1995). Cultural and ethnic ties,
geographical proximity and small markets in individual countries are some of the
major factors that operate as stimulants of this type of investment. TNCs from the
South often have lower overhead costs, and they frequently employ local managers.
They thus possess greater expertise in dealing with the economic and political
conditions of a host developing country than TNCs from developed countries (Wells,
1983). Furthermore, TNCs from developing countries are relatively small and use
comparatively more labour-intensive technologies and have higher chances of
creating technology spillovers. Most FDI industries in Nepal, for instance, concentrate
on small and medium-scale enterprises (SMEs). FDI in Nepal is much more the
handiwork of individual foreign investors than corporate business enterprises. Almost
65 per cent of foreign enterprises had been registered in Nepal as small-scale
ventures. Indian investments are mostly labour-intensive, while those of the USA
generally more capital-intensive. The Department of Industries, Nepal statistics
(2006), shows that employment per Rs one million investment was 4.8 for India, 34.1
for Bangladesh and 19 for Pakistan in 2005-06. For the UK and China, which were
the other largest investors, it was two and three respectively. Thus the benefits of
regional FDI are highly beneficial in terms of employment generation15. Accordingly,
TNCs from the South, because of the nature of their comparative advantages, tend to
invest in countries that are at a similar or lower level of development than their home
countries (Wells, 1983). Evidence suggests that India -Sri Lanka FTA has led to

15
A careful analysis of FDI patterns in the region (based on the reports published by Pakistan, BOI,
Bangladesh BOI and India SIA) reveals that in general, investments from the developing countries
are manufacturing oriented. On the other hand, developed countries' investments are mostly service-
oriented and are concentrated in highly capital intensive sectors such as power, energy and
telecommunication. Developing country firms are also investing in the service sector but they focus
on low technology and low scale intensive IT and IT enabled professional, management and financial
services.

22
Table 14: Composition of Export baskets of South Asian Countries at two digit level: 2004 (% share in total exports)

In SL Pak Nepal Bangladesh Maldives

Mineral fuels 15.0 Textile Pdts 48.7 Textile 39.8 Textile 39.9 Textile 86.3 Fish 97.5
products products products Stuff
Gems 12.7 Coffee, tea and 9.7 Cotton 21.3 Fats and oils 6.9 Fish 4.2 TOTAL 97.5
spices
organic 4.5 Rubber and 8.8 Cereals 6.8 Plastics 4.4 Leather 3.0
chemicals articles
iron & steel 4.4 Gems 5.7 Leather 5.9 chemical 6.6 Headgear 1.1
products
Tex. products 4.2 Fish 2.7 Mineral 5.0 Iron and 3.2 Fertilizers 0.6
fuels etc steel
Engineering 4.0 Elec., elect. 2.4 Toys, 1.8 Beverages, 2.8 TOTAL 95.2
equipment sports
goods
ores etc 3.9 Engineering 1.9 TOTAL 80.5 TOTAL 63.9
Elec., elect. 3.3 Animal, 1.5
equipment vegetable oils
cotton 3.1 Metals 1.4
vehicles 3.0 TOTAL 82.9
TOTAL 58.1

Source : ITC

23
Table 15 : An Overview of FDI Policies in South Asia

Bangladesh India Nepal Pakistan Sri Lanka Bhutan Maldives

Pre-entry Treatment
Sectoral ban on Private 9 broad Alchohol Positive list of
FDI ownership sectors sectors
restricted in
4 sectors
Caps of foreign None Ownership FDI 100% in all A negative list of Max 70% equity Investment>5
ownership cap on 16 prohibited in sectors allowed. million can be
sectors 23 sectors. wholly owned.
Screening No Screening for Approval No screening Strict screening FDI committee Mandatory
screening FDI in from except in 5 by BOI which meets Screening if
except in specified department of mfg sectors16 once in 3 months foreign equity
telecom, sectors industries >51%
power and Conditional
mineral screening if it is
<51%
Minimum None None None Ag: $0.3mn, None Mfg. $1Mn None
Capital Infra : $0.3mn, Services: $0.5
requirement IT and Mn
Telecom:
$0.15 mn.
Location None None None None None None None

16
Arms and ammunitions -High Explosives. -Radioactive substances -Security Printing, Currency and Mint

24
 Bangladesh India Nepal Pakistan Sri Lanka Bhutan Maldives

Post entry treatment

Employment Restricted No*17
Performance none In the small None None None Use of local
requirement scale sector content
encouraged
Technology None None Sub to Limits in None Sub. To NO*
imports approval agriculture and approvals
service
Restrictions on None None Sub. To None None Sub to NO*
repatriation of approvals restrictions
capital and
profits.

Tax incentives Tax Non Non 50% on plant Non Non Foreign investors
incentives discriminatory discriminatory and machinery discriminatory discriminatory have to pay royalty
on expatriate and incentives to the government
incomes. depreciation

Sources : BOI : Bangladesh, Pakistan, Sri Lanka; Royal Monetary Authority : Bhutan; DOI : Nepal and SIA : India; FISB: Maldives

17
Rules and conditions under which investors may operate, including the approved business activities, lease terms for land, the royalty payments and fees due to the
government, and investment duration are governed by contracts signed between the government and investors.

25
substantial expansion of investment in both the countries from the partner country
(JSG, 2003, RIS, 2004). Historically, investment relations have remained one-way
flows of FDI from India to Sri Lanka (JSG 2003). Not only has bilateral investment
been increasing, sectoral composition has also been subject to diversification.

The inclusion of investment provisions would further boost the mutual benefits from
economic integration. Like many other emerging market economies, South Asian
countries have also taken a number of steps to liberalize FDI regimes by augmenting
the automatic approval route, lowering sectoral caps, simplifying exchange controls
and intensifying investment promotion. Table 13 provides an overview of FDI
policies in terms of pre-entry and post-entry treatment of foreign investors. Pakistan
seems to be the most liberal FDI regime followed by Bangladesh, India, Sri Lanka,
Maldives and Bhutan, in that order. Although most countries ensure post-entry
national treatment, pre-entry restrictions are quite high. These barriers can be
addressed at the regional level without compromising policy space and investment
liberalization may be implemented effectively.

Unrestricted access to neighbouring markets will allow investors to expand their

capacities, restructure their businesses and diversify their production facilities.
Greater regional cooperation in FDI will not only promote intra-regional investment
but also extra-regional investment by stimulating efficiency and growth, and building
investor-confidence. This, in turn, has the capacity to transform the dynamic
comparative advantages of these economies.

Most countries have adopted an “FDI targeting approach”. In that context they are
aiming at FDI in certain priority sectors. Table 16 provides a country-wise list of
these segments. It clearly shows that most countries are marking investment in light
and labour intensive industries where regional firms have developed competitive
advantages.

Table 16: Priority Sectors for FDI in South Asian Countries

Pakistan Priority industries: tourism, housing, engineering, chemicals and

construction. “Value added export industries”: manufacturing
categories such as garments, bed linens, surgical instruments, and
sporting goods. High-Tech and Information Technology industries:
chip manufacturing, software development and precision equipment
manufacturing.
Bangladesh Textiles, Electronics, IT, natural gas based industries, frozen foods,
leather, Ceramics, Light engineering and agro based
Nepal Medicinal and aromatic plants, agro based (mushroom., spices,
vegetables, fruits), Dairy, Tea, Sericulture, Hydro power, leather,
Poultry and textiles
Sri Lanka Electronics, light engineering, Textiles, Rubber, mineral and
processing, Tourism, IT, Gems and Jewellery, Health care and
Pharmaceuticals, ceramics, services
Bhutan Hydro power, agro processing, tourism, medicinal plants,
Maldives Marine based industries, Tourism, Infrastructure and air and sea
transport
Source: Compiled from the FDI promotion agency of each country

26
Deeper regional cooperation which involves cooperation in investment and economic
integration will thus promote FDI flows by overcoming regional apprehensions and
constraints. This will pave the way for the most efficient use of the region’s resources
through additional economies of scale, value addition, employment and diffusion of
technology. It’s important to re-emphasize that this trend promotes not only intra FDI
flows but also extra regional FDI.

The literature, however, suggests that the effects of regional integration on FDI are
more pronounced when they coincide with macro dynamism and economic
liberalization. Therefore, we argue that FDI growth in response to RTAs would
depend on the following factors:

• Macro dynamism
• Multilateral liberalization

It is, as a result, important to examine these factors to assess the prospects of intra-
regional FDI.

5.1 Macro economic dynamics

High growth prospects

South Asia in recent years has been one of the most dynamic regions of the world in
terms of economic transformation (Table 17). Low dependency rate with large
working population offers a tremendous opportunity for economic growth in South
Asia, provided that the greater labor supply is productively employed, and that
savings and investment increase. Growth prospects are bright for the short and
medium term for South Asia (Global Growth Prospects 2007). Greater regional
integration is cited as one of the factors that contributed to this growth in the region
(Global growth Prospects, 2007). Dramatic economic growth and its consequences
have created tremendous opportunities for investors.

Large markets

Evidence suggests that market size offered by a regional agreement is crucial for
determining the success of the region in attracting FDI. The combined size of the
SAARC countries is around $ 1 trillion. In terms of PPP it is 4.5 trillion, which ranks
fourth in the world after the US, EU and China and is higher than even Japan ($ 4.2
trillion in 2006). The combined size of population is 1.5 billion which constitutes 23
per cent of the total world population. It is expected to grow at the rate well above
1per cent in all the countries. Large markets are an incentive for TNCs to invest.

Industrial Dynamism

The change from traditional to modern manufacturing under way in most of these
countries is creating new opportunities of investment and demand higher skills and
technologies that are likely to enhance the role of FDI.

27
Table 17: Macro economic dynamics of South Asian Economies

India Bangladesh Nepal Pakistan Sri Lanka Bhutan Maldives Total

PPP GDP (2005-6) 3787 296 42 366 89 2.9 1.25 4580

GDP $ mn (2005-6) 785 60 7.3 107.3 23.48 .84 .82 983.1

Population 1049.5 143.8 24.6 149.9 18.9 2.2 0.339 1389.2

Median Age (yrs) 24.4 21.5 19.9 19.4 29.1 20.2 17.5 21.7

Population growth rate 2004-20 1.3 1.6 1.8 2.1 1 2.1 2.7 1.8

GDP growth rate 8.1 6.2 2.8 7.6 5.8 7 9 6.6

Export 25 17.2 10.3 14.7 10.3 39.3 17 19.1

Imports 34.4 15.3 15.7 30 13.3 28.8 24 23.1

Source: World Development Indicators, World Fact Book, Royal Monetary Authority Annual Report

28
Emergence of the Service sector

The service sector has emerged as the major contributor of income in South Asian
countries accounting for more than 50 per cent of the region’s GDP. Irrespective of
the debate that has been raging over service- based growth, one can argue that this has
opened enormous possibilities of FDI through sectoral linkages.

5.2 Multilateral Liberalisation

The process of economic liberalisation was initiated at different points of time in

diverse countries but as discussed above they gained momentum in the 1990s. The
second phase of liberalization was initiated in the post-2000 period. Major reforms
were carried out in the areas of trade policy and the exchange rate system and fiscal
and financial management. These policies have reduced distortions and increased
efficiency and cleared the uncertainty about the future. Most countries have acceded
to the WTO. Since WTO commitments are mandatory in nature, WTO membership
will offset the policy doubts created by political and bureaucratic interventions and
produce a “locking” effect. This is also likely to make a positive impact on both intra
and extra regional FDI because the two are complementary.

6. Challenges and Constraints

The above analysis suggests that the prospects for FDI growth are good and would
improve with deeper integration. These arguments notwithstanding, there are several
factors that can impede growth of FDI flows both intra and extra regional. These are
discussed below.

Political factors

Despite the economic stakes, political compulsions are preventing the authorities, in
some instances, from encouraging FDI movement between contiguous or physically
adjacent countries. Bilateral relations there are unfortunately defined by mistrust and
antagonism18.Tense relationships, mired in narrow nationalism, have discouraged
active involvement of companies. Regional agreements thus could not go far in
overcoming local hurdles.
Psychological factors

18
For instance, in 2005, leading business houses— led by Rahul Bajaj’s Bajaj Auto, Lalit Suri’s Bharat
Hotels and the Tata group, sought permission to set up their ventures in Pakistan but were rejected.
Later, TCS was allowed to set up its production base there. Similarly, ninety-five local and foreign
companies, including six Indian firms, applied to the Pakistan Telecom Authority (PTA), seeking
licence to initiate long- distance international (LDI) and local loop (LL) operations when it opened
up its telecom sector. But there were reservations about allowing Indian firms owing to problems in
bilateral relations. TATA submitted an expression of interest with the Bangladesh Board of
Investment (BoI) in October, 2004. TATA’s US$2 billion proposal included the setting up of a steel
plant and projections in fertilizer, coal and electricity. However, it has not yet received the approval
(Bhattacharya, 2007 for discussion). The experiences of other countries might be similar. Kelegama
and Mukherjee (2007) have highlighted problems that Indian and Sri Lankan companies are facing
across borders.

29
Efforts are being made to promote FDI from the developed countries. It is believed
that TNCs from there can bring superior technologies and that the spillover effects
will modernize the local economies. This psyche, inherited from colonial rule, is one
of the hurdles in the way of promoting FDI from within the region.

Restrictions on outward investment

Liberalizing the inward FDI regime alone is a necessary, but insufficient, condition
for intra regional FDI flows. Promotion of such FDI requires eliminating restrictions
on outward-oriented FDI flows also. Outward FDI flows are highly restricted in South
Asian countries owing to their implication for foreign exchange outflows. The policy
for Indian direct investment abroad has been substantially liberalized over the past
three years and there has been tremendous increase in outward investment originated
in the country. However, there are ceilings on specified outward investments. In other
countries also it is tightly regulated with ceilings on the overall flows. These
restrictions can affect the patterns of FDI flows by diverting them to sectors which
require less capital and are less scale- intensive. These ceilings need to be addressed.

Structural barriers

Governance: Leading from a state of extreme over-regulation, the trend since 1991
has been a gradual decrease of governmental obstruction of private business. Many
regulatory changes, however, have not yet been politically possible to implement.
These economies are still hobbled by excessive rules and a powerful bureaucracy and
leaders with broad discretionary powers (see USTR 2006).

Table 18: Regional Governance indices

Average Time spent Official Unofficial Bribes Bribes

time in predictability payments to Tax to secure
spent government officials contract
with tax regulations
officials
East Asia & 4.91 7.25 51.86 1.81 33.59 1.82
Pacific
Europe & 2.82 5.4 45.13 1.04 44.79 1.57
Central Asia
Latin 2.75 10.39 40.11 1.52 6.83 2.94
America &
Caribbean
Middle East 3.52 9.94 50.87 2.72 40.09 1.3
& North
Africa
OECD 1.65 2.97 57.52 0.13 28.26 0.55
South Asia 3.19 7.1 61.52 2.02 46.94 3.32
Sub-Saharan 4.41 8.55 48.97 1.94 20.74 4.04
Africa

Source: Enterprise surveys by IFC

The IFC research study measured the number of steps an investor must take to start up
a firm, the length of time required to complete mandatory market entry procedures

30
and associated costs19 for several countries. Their findings for South Asia indicate
they are just slightly better than the Sub Saharan countries in most cases (Table 18).
Transparency International, the global watchdog on corruption, has also reported
high levels of corruption in these countries (TI, 2006).

Infrastructure: Poor infrastructure is stated to be another structural blockage that

these countries are facing. Table 19 Shows that in most cases they lag behind Sub
Saharan countries.

Table 19 : Infrastructure indices of selected regions

Delays in No.of Value lost No. of Delays in

electrical electrical due to water telephone
connection outage electrical supply connections
outage failure
East Asia & 12.02 7.04 2.39 1.86 9.32
Pacific
Europe & Central 7.4 11.65 3 5 10.33
Asia
Latin America & 26.49 14.91 3.26 9.06 37.47
Caribbean
Middle East & 43.84 44.27 4.69 34.54 51.46
North Africa
OECD 8.32 1.14 2.25 0.18 7.91

South Asia 48.18 109.2 5.56 7.57 53.85

Sub-Saharan 38.12 51.96 4.78 29.82 51.39

Africa

Source: Enterprise Surveys, IFC 2006

Trade Rules: In a recent study, Chaturvedi (2007) has discussed the current status of
trade rules and the prospects of their facilitation. He argues that complex customs,
rules and long (customs) delays increase the costs and hence competitiveness of
exporters affecting not only trade but also efficiency seeking investment (see also
Doing Business Report of the World Bank). The IFC report puts these countries just
above Sub Saharan countries (Table 20).

19
The Enterprise Analysis unit provides Enterprise Survey data on the investment climate in 94
countries, based on surveys of more than 60,000 firms. Enterprise surveys measure business
perceptions of the investment climate. Using stratified sampling, surveys are taken of hundreds of
entrepreneurs per country who describe the impact of their country’s investment climate on their
firm. Responses reflect their managers' actual experiences. They span all major investment climate
topics from infrastructure to crime. “Doing Business” Report of the World Bank also provides a
similar database.

31
Table 20: Trade Rules in Selected Regions of the World

Average Longest Average time Longest time to

export export to claim claim imports
clearance clear imports from from customs
time time customs
East Asia & Pacific 3.71 5.98 4.89 8.98
Europe & Central 2.91 5.4 3.51 25
Asia
Latin America & 4.79 9.16 7.22 14.72
Caribbean
Middle East & 5.14 9.43 10.3 21.29
North Africa
OECD 4.63 8.33 5.28 9.4
South Asia 7.72 12.66 10.08 17.54
Sub-Saharan Africa 4.45 8.69 7.37 14.55
Source: IFC

Legal system: A fundamental impediment to investment in many South Asian

countries is the existence of weak and slow legal systems in which the enforceability
of contracts is uncertain. Foreign investors face opaque legal structures. Firms
complain that basic legal procedures are neither quick nor routine. There is no penalty
for delaying proceedings (Table 21).

Table 21: Legal System Standards across different regions

Confidence level in the

legal system
East Asia & Pacific 65.83
Europe & Central Asia 55.18
Latin America & Caribbean 55.48
Middle East & North Africa 66.63
OECD 73.6
South Asia 53.72
Sub-Saharan Africa 60.42

Extremism and political instability

Extortion of money from businesses by ruffians claiming political backing is common

in Bangladesh. Power struggles, the rapid rise of fundamentalism and militarization,
have weakened the political system. For nine years, Nepal was wracked by a violent
Maoist insurgency, with the conflict initially confined to the mid-western districts.

There are significant threats to foreign interests in Pakistan, both from al-Qaida and
Taliban elements and domestic terrorist organizations. In India, there are violent
movements in Kashmir and some northeastern States. Sri Lanka has been plagued by
the LTTE. Only Maldives and Bhutan have a long record of political tranquillity.

32
Rigid labour laws and Trade unions

There are more than 6,300 registered trade unions in Bangladesh, with in excess of
1.9 million union members. Bangladesh’s labour unions, most of them associated with
political parties, are often militant. In India, there are more than seven million
unionized workers. Most unions are linked to political parties and have narrow
personal stakes. In Pakistan, however, organized labour comprises a very small
percentage of the total workforce. Although associations are not expressly prohibited,
the Government does not recognize the right to form unions or to strike. Hence,
labour actions and disputes are rare.

Visas

The exclusion of cross border movement of labour poses grave difficulties for
investors. The problems faced include long procedures, high costs, frequent renewals
and the attitude towards investors..

7. Conclusion

The slow progress and modest achievements of regional integration in South Asia
have generated significant skepticism about its role as an effective arrangement.
However, the above analysis indicates that regional integration has the potential to
promote economic development in individual countries irrespective of size and the
level of growth. This potential can be exploited only through a deeper form of
cooperation. The success of the India-Sri Lanka FTA underlines the hypothesis. A
number of challenges remain. Unresolved structural weaknesses, institutional
bottlenecks, political movements, narrow nationalism and mutual mistrust are several
factors that explain the failure of the region to tap its potential. These problems
themselves provide strong motivation for strengthening cooperation. It is only through
deeper regional collaboration that these shortcomings can be addressed and rectified.
Plans for the creation of the SAARC Development Fund, the SAARC Development
Bank and the SAARC University, need immediate implementation along with the
lowering of investment barriers across geographically adjacent territories. Increased
investment flows will improve the competitiveness of regional firms in global
markets. Generally, it is believed that inward investment is beneficial for the host
countries’ firms. But it is important to note that outward investment itself works as a
catalyst for improving commercial competitiveness. Regional cooperation, by
promoting cross border investment, will offer opportunities to firms, especially from
smaller countries, to grow in terms of size and capabilities to compete globally.
Furthermore, it can help in raising efficiency and industrial restructuring. It is
essential that South Asian countries take a big stride forward to forge deeper
integration.

33
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Waldkirch, A. (2003), The New Regionalism and Foreign Direct Investment: The
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 LATEST ICRIER’S WORKING PAPERS

NO. TITLE AUTHOR YEAR

217 DEVELOPMENT STRATEGY FOR SURABHI MITTAL JULY 2008

THE HILL DISTRICTS OF GAURAV TRIPATHI
UTTARAKHAND DEEPTI SETHI

216 IMPACT OF PROPOSED PRAVAKAR SAHOO JULY 2008

COMMODITY TRANSACTION TAX RAJIV KUMAR
ON FUTURES TRADING IN INDIA

215 INDEX OF FINANCIAL INCLUSION MANDIRA SARMA JUNE 2008

214 MEASURING SUSTAINABILITY PURNAMITA MAY 2008

WITH MACROECONOMIC DATA DASGUPTA
FOR INDIA SHIKHA GUPTA

213 DEEPENING INTRAREGIONAL MEENU TEWARI APRIL 2008

TRADE AND INVESTMENT IN
SOUTH ASIA
THE CASE OF THE TEXTILES AND
CLOTHING INDUSTRY

212 CHANGING PARADIGM OF INDO- P G RAJAMOHAN APRIL 2008

JAPAN RELATIONS: DIL BAHADUR
OPPORTUNITIES AND RAHUT
CHALLENGES JABIN T JACOB

211 WHAT CONSTRAINS INDIAN POONAM GUPTA MARCH

MANUFACTURING? RANA HASAN 2008
UTSAV KUMAR

210 AN OPEN SERVICES REGIME SUPARNA MARCH

RECIPE FOR JOBLESS GROWTH? KARMAKAR 2008

209 DEMAND-SUPPLY TRENDS AND SURABHI MITTAL MARCH

PROJECTIONS OF FOOD IN INDIA 2008

208 FEASIBILITY OF AN ASIAN ABHIJIT SEN GUPTA MARCH

CURRENCY UNIT AMITENDU PALIT 2008

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 About ICRIER
ICRIER, established in August 1981, is an autonomous, policy-oriented, not-
for-profit research institute. We have nurtured our cherished autonomy by
establishing an endowment fund, income from which meets all our
administration expenses. ICRIER’s offices are located in the prime institutional
complex of India Habitat Centre, New Delhi. The prime focus of all our work is
to support India’s interface with the global economy.

ICRIER’s founding Chairman was Dr. K.B. Lall who led the organization since
its inception from 1981 till 1992 when he handed over the Chairmanship to Mr.
R.N. Malhotra (1992-1996). He was followed by Dr. I.G. Patel who remained
Chairman from 1997 to 2005 until his demise in July 2005. ICRIER’s current
Chairperson is Dr. Isher Judge Ahluwalia.

Amongst ICRIER’s founding members are: Dr. Manmohan Singh, Dr. C.

Rangarajan, Dr. M.S. Swaminathan, Dr. Jagdish Bhagwati and Dr. Montek
Singh Ahluwalia.

ICRIER conducts thematic research in the following six thrust areas:

• Trade, Openness, Restructuring and Competitiveness

• WTO-Related Issues
• Regional and Bilateral Issues
• Financial Liberalization and Integration
• Macro-economic Management in an Open Economy
• Strategic Aspects of India’s External Relations

In addition, ICRIER holds public policy workshops to bring together policy

makers, academicians, Union Cabinet Ministers, senior industry representatives,
Members of Parliament and media persons to try and forge a consensus on
issues of major policy interest. In the effort to better understand global
developments and experiences of other economies which have a bearing on
India’s policies and performance, ICRIER invites distinguished scholars and
policy makers from around the world to deliver public lectures on economic
themes of interest to contemporary India.

ICRIER’s highly qualified core team of researchers includes several PhDs from
reputed Indian and foreign universities. At present the team has 20 Senior
Economists, 24 Research Associates/Assistants and 29 External Consultants.
The team is led by Dr. Rajiv Kumar, D.Phil in Economics from Oxford
University and PhD from Lucknow University.

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